Seymour Temkin - Interim Chief Executive Officer Michael Salter - CFO

Matt Bottomley - Canaccord Genuity Joel Hurren - RBC Capital Markets

Good morning, ladies and gentlemen. Welcome to the Medical Facilities Corporation 2015 Fourth Quarter and Year End Results Conference Call. Before turning the call over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Securities Laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information Form and Medical Facilities' other filings with Canadian Securities Regulators. Medical Facilities does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that today's call is being recorded for the benefit of individual shareholders, the media and other interested parties who may want to review the call at a later time. I would now like to turn the meeting over to Seymour Temkin, Interim Chief Executive Officer of Medical Facilities. Please go ahead, Mr. Temkin.

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us for today's conference call. With me today is Michael Salter, Chief Financial Officer of Medical Facilities Corporation. Prior to the market opening today, we reported our fourth quarter and year-end 2015 financial results. A news release, financial statements, MD&A may be accessed through our corporate website and we also filed on SEDAR this morning. As we discuss our financial results this morning, I’d like to remind listeners that our financial results do not include income from discontinued operations which refer to Dakota Plains Surgical Center transaction that closed earlier this year. 2015 was a year with several changes for many. The instability of the global macro environment, continued pressured on oil prices, the volatility of the equity market, the impacts were all felt across industries and companies. In spite of all the difficulties and economic conditions, I’m pleased to report that Medical Facilities recorded another year of strong revenue growth, an increase of 4% to $309 million compared to the prior year of $297 million. Our solid operations and financial performance continued throughout 2015, as we recorded a 12% increase from income from operations of $75 million compared to the prior year. Cash available for distributions for the full-year 2015 was CAD46 million, an increase of CAD4.5 million compared to the full-year 2014. In U.S. dollar terms, we experienced a slight decrease of $1.6 million to cash available for distribution to $35.9 million. MFC’s cash available distribution Canadian and U.S. dollars were impacted by higher foreign exchange losses on foreign exchange forward contracts, which has now all matured during the year. Overall our cash available for distribution resulted in a favorable 2015 payout ratio of 76.7% compared to 85.2% for the full-year ended 2014. I want to take time to reiterate that we strengthen and now grow our company we assess opportunities that are in the best interest of all our stakeholders. With over a decade of experience with our unique business model, to-date, we have distributed 143 consecutive dividends to our shareholders and remain comfortable with our payout ratio levels. Medical Facilities has a Normal Course Issuer program to which we are extremely active, demonstrated by repurchase of over one million shares since inception of the buyback program. We intend to continue with our program, given the ability to repurchase shares at favorable prices. However I’d like to note that if foreign exchange losses were excluded, our payout ratio would have improved further to 67.8% at the average exchange rate of 1.28 for the full-year 2015. Over the past year, Medical Facilities has continued with its strategies and reinvestment in our business and service offering to further strengthen our presence in our core markets. The investments made in urgent care - urgent and primary care at our South Dakota facility had begun to positively impact our results. The objectives for the company and our Centers remain focused on recruitment and expansion along with the management of balancing the mix of physicians practicing at our facilities, [indiscernible] recruiting high-skilled physicians and staff demonstrates our commitment to provide our patients with high quality care. As common practice for the business, we review a number of opportunities and adjust as series lines accordingly. Initiatives and expansion are assessed by these Centers management and the board of directors to ensure that opportunities complement our existing offerings and are mutually beneficial for the company and our stakeholders. As we have previously communicated to the market, our year-over-year revenue and income from operation can fluctuate from quarter-to-quarter and center-by-center. This is a result of shifts in case, payer mix, as well as change in the case counts, which are the main drivers of our results. Michael will now provide more details and insight into our financial performance for the fourth quarter of 2015, and I will conclude our views on how the larger economic environment continues to impact the healthcare market and our business. We’ll then open the call for any questions you may have. With that, let me turn the call over to Michael.

Thank you, Seymour, and good morning, ladies and gentlemen. Please note that all dollar amounts expressed in today's call are in U.S. dollars unless otherwise stated. As Seymour mentioned earlier, we ended the year with a strong fourth quarter with increases resulting from higher case volumes, favorable shifts in payer mix and increased revenue from our pain management, imaging and our urgent and primary care cases. For the fourth quarter, we recorded revenue of $89.8 million, up 9% compared with $82.5 million in the same quarter last year. Our favorable shift in payer mix was attributable to a higher portion of cases that were paid through commercial insurance and self-payments by patients. Our South Dakota facilities continue to experience a positive impact on case volumes from the Patient Choice legislation passed in November 2015. The legislation provides patients with the ability to choose a provider of their choice without incurring any additional out-of-pocket expenses. For providers including doctors, clinics and surgical hospitals, it allows them to you join previously restricted insurance networks. The legislation has given us an opportunity to further increase our reach to access and treat more patients. All of our Centers recorded growth in their revenues with the largest increases seen at our Sioux Falls and Arkansas facilities. Sioux Falls increase in revenues stems from a favorable shift in payer mix, growth in surgical cases and pain management procedures, as well as ancillary services being imaging and primary care. In spite of that growth in revenue, the facilities results were partially offset by the changes in case mix and lower electronic health records and Centers revenue, which is in its final phase. It is worthy to note that all of our specialty surgical hospitals achieved outstanding HCAHPS scores which reflect our high standards in quality of care. Arkansas continues its track record of stable revenue generation as the Center continued to see an increase in surgical case volumes, in spite of the changes in case mix during the fourth quarter of 2015. Black Hills recorded a slight increase in revenue as a result of more favorable payer mix as demonstrated by an increase in commercial insurance payments along with an increase in surgical case volumes. Revenue growth was marginal as it was offset by a change in case mix, as we saw an increase in ENT cases and a shift in the type of orthopedic cases performed. Oklahoma experienced increases in both surgical and pain management cases, driving revenues higher on a year-over-year basis. Operating income, while up, was somewhat impacted by a less favorable payer mix and lower per case revenue from pain management. Our ambulatory surgery center locator in Newport, California saw a significant growth in fourth quarter revenue with a more favorable case mix as a result of increased cases of women's health and complex orthopedic cases. A shift in the way orthopedic implants are reimbursed in that state by certain insurers, combined with a favorable shift in payer mix, drove the 9% growth in revenue during the quarter. On a consolidated basis, we continue to benefit from previously uninsured patients whom are now covered under the healthcare exchanges established as a result of the Patient Protection and Affordable Care Act. I'm also pleased to report that on a consolidated basis during the fourth quarter of 2015, MFC has seen a 9% increase in surgical cases with the large portion of them being outpatient, along with a 4% growth in the number of pain management procedures. For the fourth quarter of 2015, income from operations on a consolidated basis increased by $5.7 million or 26% to $27.8 million from $22.1 million as compared to the same period last year. This reflects the growth in revenue and decrease in operating expenses. However, those results are distorted by a decreased G&A expense of nearly $2.7 million, which results from a non-cash reversal of our accrued rent liability at our Arkansas facility. During the fourth quarter, we recorded net income from continuing operations of $25.3 million compared to $6.8 million for the same quarter last year. The significant increase of $18.6 million was primarily attributable to the impact of the decline in value of the exchangeable interest liability. That impact is driven by the changes in the number of common shares that is to be issued for the exchangeable interest, the changes in the market price of the company's shares and fluctuations in the value of the Canadian dollar against the U.S. dollar. Cash available for distribution, including the realized losses on foreign exchange forward contracts for the fourth quarter of 2015, was CAD12.6 million, a slight increase from CAD12.2 million, generated in the fourth quarter of last year. Our declared distributions CAD8.8 million, consistent with the same period a year earlier. The resulting payout ratio for this quarter was at favorable 69.7% compared to 72.1% for the same period one year ago, and as Seymour noted earlier, improves further when foreign exchange losses are excluded. As of December 31, 2015, our cash, cash equivalents and short-term investments were at healthy $70.9 million. All in all, the fourth quarter experienced strong improvements in revenue, growth at all of our facilities, and we are very pleased with the continued revenue contributions from our ancillary services. We remain committed to utilizing our strong financial position to invest in quality opportunities whether internal or external, that maximizes the returns for our stakeholders, which include improving patient outcomes. Let me now call on Seymour for his closing remarks. Seymour?

Thank you, Michael. MFC ended the year with a strong fourth quarter and a full-year of strong performance as a result of increased case volumes, favorable shift in payer mix and along with increased revenue received from ancillary services. Subsequent to December 31, 2015, Medical Facilities announced the acquisition of IMD, which provides MFC with the platform to streamline corporate systems along with opportunities for future benefits and cost synergies. At an initial glance, the transaction may seem small in size but the acquisition of IMD allows us to add new revenue services in a controlled manner by addressing the needs of those in the healthcare industry. As MFC begins to transition to a new management team, with the support [ph] of board are like to assure our stakeholders that the recruitment process for MFC’s next CEO is progressing very well. MFC underwent an intensive review and assessment of talented professionals with the role of the CEO. Our Board has met with a number of very accomplished candidates that expressed the desire to build on MFC’s success. As an update, I'd like to advise you, we are nearing the final stages of the recruitment process and look forward to announcing our new CEO in the near future. Before I provide an update on the current market environment and future outlook for the company, I would like to remind listeners that MFC outlook can be affected by many interrelated factors, which include the economic, healthcare reforms and management strategies. According to the Federal Reserve press release, despite the slower growth seen in the latter part of 2015, the labor market, the household spending and overall housing market continued to show moderate improvements. Medical Facilities remains confident in operation and financial abilities as our geographic applications [ph] in the Midwest continue to exhibit favorable economic trends in comparison to the U.S. national average. Over 90% of our revenues are generated from facilities that are situated in South Dakota, Oklahoma and Arkansas and have stood resilient against the challenging economic environment. In terms of healthcare reform, while it's difficult to assess the full long-term impact of the Patient Protection and Affordable Care Act, we believe its implementation will cause the healthcare industry to expand to number of opportunities and challenges. We anticipate the increase in the number of patients on the coverage will result in an increased number of surgical cases with the reduction in unconcentrated care. Healthcare entities may also be offered incentives rewarding goals to meet quality of care and operation criteria, and our facilities are well positioned to be the beneficiaries of such trends. However the ongoing pressure on reimbursement rates remain a challenge for most of the healthcare providers. The healthcare sector has experienced a number of significant mergers, acquisitions by the insurance companies, bankruptcies and failures of the insurance cooperatives, which were heavily subsidized under the PPACA. Further extension of coverage, which while significant, falls significantly shorter covering the number of uninsured that the plan was designed to cover. It would be important to note that the price increases by health coverage, including those offered under the exchange, have begun to hit double-digits, which elevates the possibility for increase in the subsidies under the PPACA, and may lead to congruent external impacts over cost control. With the healthy balance sheet, MFC will continue to assess identity accretive acquisition opportunities, while applying base structures and cost reduction initiatives to achieve the company’s business and strategic objectives. We remain confident that our continued ability to capitalize on our unique business model, which includes physician-centric focus, complemented by physician ownerships and an active role in incentive management. We continue to support our Centers with physician recruitment efforts, as increase in a number of physicians involving medical staff privileges and/or ownership interests in our Centers are key drivers positively impacting our results. The combination of increased average age and life expectancy of the U.S. population, overall population growth and an increased proportion of population with access to healthcare insurance and advances in science and technology will continue to drive an increased demand for services we provide at our Centers. With growing demographics and the need for healthcare services, Medical Facilities look forward to meeting its demand as we continue to provide all our patients with top quality care in a comfortable and a hotel-inspired environment. Our management team remains confident in our ability to generate cash available for distribution that is more than adequate to satisfy our current annual dividend of CAD1.125 per common share. With that, I’d like to open the line for any questions you may have. Operator?

[Operator Instructions] We’ll pause for just a moment to compile the Q&A roster. Your first question comes from Matt Bottomley from Canaccord Genuity. Your line is open.

Good morning. Thanks for taking my question. I’m just on the line here for Neil Maruoka. Just a quick question for you guys with respect to maybe what your plans are for your foreign exchange going forward. I know that your contracts have rolled off the books now, so with rates at a much more - with U.S. rates at a much more favorable position now, are you potentially planning on locking those in, and if so, how do you think that might impact your payout ratio and the potential to may be repurchased more common shares in 2016? I see here that you disclosed here that you repurchased 4.5 million. I'm just wondering what the magnitude might be in your best estimation going forward, considering where your distributable cash probably land this year?

It’s Seymour Temkin. So it’s about three questions that you asked, so I'll try and deal with them in reverse order. We are committed to an NCIB program where we feel the opportunities that our share price does not reflect value and does not reflect our potential value, and we are committed to that program and we have demonstrated that over the past year and we’ll continue that. To guess where the exchange rate - where the U.S. dollar exchange rate will be? We have told the market that our policy is no longer to hedge but we should have the right to look at that from time to time. I mean currencies have never been as volatile as they are today. The Canadian dollar which was $0.72 every one is predicting that to demise down to $0.50, now bounce back to $0.76, tomorrow its $0.75. So policy is that we will remain unhedged unless we think the environment of the currencies change dramatically, we reserve that right.

Okay, thanks. So I imagine so far in the current year sort of almost the quarter end, that you’d be seeing some favorable movement to your distributable cash compared to the contracts that you had last year. Is that - sort of from a directional standpoint, is that a fair assessment?

Absolutely.

Okay, great. And then just - actually no, I'll go back in queue in case someone else has another question. So thank you very much.

Thank you.

[Operator Instructions] Your next question comes from Joel Hurren from RBC Capital Markets. Your line is open.

Hi there. It’s Joel on for Doug here. Congratulations on the strong quarter. It’s a good way to end the year. Good morning.

Good morning. Joel.

Two quick questions. One, could you just provide a little bit more detail on the G&A expense, and why it was about $2 million artificially lower? And then second question, say trends in hiring towards the end of the year, hiring of physicians for the hospitals? Thank you.

I'll turn the question to Michael.

Yes. Thanks Seymour. On the G&A, the item you referred to, Joel, is the - it was a straight line rent adjustment on the building lease under the American accounting rules and similar under the Canadian. You end up - literally the leases have escalators built into them over time but you have to record the rent expense on a straight line basis. So in the early years of the lease, you're actually building up an accrued liability and it’s a non-cash item, and you'll notice it if you look on in my favorite charts in the MD&A, you'll see the adjustments for the non-cash. What happened with Arkansas, a group of the doctors who were our also partners in Arkansas held the hospital building, the real estate, and they entered into an up REIT transaction with the REIT in the U.S. that saw them sell part of that in return for a part of the REIT to this third-party REIT. And the accounting treatment for the thing that we have to recognize that non-cash accrual liability and bring it into G&A, and of course it was a reduction of what the G&A would have been otherwise, and you will see again now going forward, you're going to see - they again will start accruing them out under that straight line. So it's purely related to that straight line rental adjustment.

Okay. Thank you.

Okay. Now you asked one other question about hiring doctors coming into the next year. Number one, we - typically in our operations, certainly the surgeons who perform the surgeries at our surgical hospitals, we do not hire those doctors. Those doctors, they may be owners of the Center and they also will have what they call medical staff privileges. In other words, they've qualified to be able to come in and perform surgeries in our facilities. I won't say that we don't have some doctors on staff, we do, but it's typically in the ancillary areas such as primary care and urgent care where we may employ doctors or what they call doctor-extenders being nurse practitioners and physician assistants and hospitals in that area but typically the surgeons are independent practice surgeons. What is relevant and what I think what your question, you may be driving out at the risk of putting words into your mouth is the efforts to add physician like surgeons to our roster of doctors with medical staff privileges to be able to practice at our facilities and that - yes, that as Seymour mentioned, is one of our continuing focus is working with our Centers and working with the doctors’ practices, where the docs work like where they practice medicine and those are our those independent contractors or independent physicians who come into perform the surgeries. We very much are focused on working with our hospitals and with those physician practices because that's where you get the addition of new physicians coming into that talent, joining those physician practices, and then because the physicians are practicing with maybe owners and hold medical staff privileges with us that those new docs will follow along and that's what we - that's clearly the game plan. That's clearly what we attempt to do. And I think we've seen some good progress in that over the years. If you look back at most of our facilities, I think it’s pretty clear cut that we have increased all of them in varying degrees. It's very specific to each locale and geography, but we have either held or increased the roster of physicians with medical staff privileges.

Perfect. Thank you very much.

Okay.

[Operator Instructions] We do not have any questions at this time. I turn the call over to the presenters.

Well, thank you, ladies and gentlemen, and good day. Thank you.

And this concludes today's conference call. You may now disconnect.